ECB officials worry about EU banks facing US fines

The European Central Bank, anxious about potentially massive U.S. penalties against BNP Paribas SA and other continental banks, is considering adding an element to ongoing financial-health exams to try to estimate the possible damage, according to industry officials.

The officials say the ECB has told them it is looking at whether banks have set aside enough money to cover the rising tab from U.S. investigations into alleged misconduct. The ECB, which will take over responsibility for supervising big euro-zone banks in November, is considering using European "stress tests" to gauge how potential penalties could affect banks' capital levels, the industry officials say. Adding a new component to the stress tests has the potential to result in banks being forced to raise additional capital.

"The regulator wants to understand the impact of potential fines on [banks'] capital structures," said a senior industry executive briefed on the ECB's thinking.

The ECB is responding to a wave of U.S. penalties against European banks for a range of misconduct, including manipulating financial benchmarks, aiding tax evasion and breaching American sanctions.

In the latest instance, the Justice Department and other U.S. authorities are pushing France's BNP to pay more than $10 billion and plead guilty to allegedly violating U.S. sanctions against countries including Iran and Sudan, according to people familiar with the discussions. A BNP spokeswoman had no immediate comment Tuesday.

The potential size of the BNP penalty has angered French regulators and politicians, who view it as excessive. Bank of France Governor Christian Noyer and a top French bank regulator traveled to New York last week to discuss the situation with their U.S. counterparts, according to people familiar with the matter.

A wide swath of the European banking industry is under U.S. scrutiny for alleged misconduct. In addition to BNP, several European banks have said they are under investigation for allegedly violating U.S. sanctions. Others are under investigation by U.S. and British authorities for alleged manipulation of benchmark interest rates. Industry officials also are worried that a yearlong investigation by regulators in the U.S. and other countries into potential rigging of currencies markets eventually could result in multibillion-dollar fines.

One issue that the ECB is trying to assess is whether banks have set aside adequate amounts to cover the increasing costs of resolving the investigations, industry officials say. For example, BNP in February said it had set aside $1.1 billion to cover the potential U.S. penalty. Two months later, the bank said that the fines "could be far in excess" of that.

An ECB spokesman noted that the central bank won't become the euro zone's banking supervisor until Nov. 4. "Until then, the national supervisors are in charge and they naturally keep us informed regarding discussions around European banks," the spokesman said. The ECB's ongoing plan to assess the industry's health "is going ahead as planned."

Executives at other banks are nervously watching the BNP saga unfold. Some have grown nervous that their banks might need to pay substantially more than expected to resolve outstanding investigations, industry officials say.

It isn't clear how European regulators might tweak their stress tests to estimate the potential costs of investigations.

The exams, being conducted on 124 banks by the ECB and the European Banking Authority, are already under way. Results are expected in October. Banks that flunk the test will need to come up with new capital to fortify themselves against future losses.

Modeling losses on bad loans in a deteriorating economic environment is relatively straightforward because regulators can apply uniform loss rates to different types of assets. But the size of a regulatory penalty is much harder to anticipate. That is partly because it hinges on subjective factors such as whether authorities detect a pattern in a bank's misconduct and perceive a bank as having been cooperative during the investigation.

ECB officials have told bank executives that they want to avoid a situation where the stress tests give a clean bill of health to a bank that, months later, sees its capital buffers severely eroded by a major financial penalty, according to the industry officials.

Brian Blackstone contributed to this article.

Write to Noémie Bisserbe at noemie.bisserbe@wsj.com and David Enrich at david.enrich@wsj.com

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